Kotak Mahindra Bank Final

Kotak Mahindra Bank
Company Analysis
REPORT BY: MR. SUMEET KARIWALA Roll No. 31 MMS Batch 1 Welingkar Institute of Management
Kotak Mahindra Bank

Company Analysis Contents
CONTENTS....................................................................................................................... 2 KOTAK MAHINDRA BANK INTRODUCTION....................................................................................3 GROUP STRUCTURE..........................................................................................................3 BRIEF HISTORY...............................................................................................................4 THE INDIAN FINANCIAL SECTOR...............................................................................................5 INDIAN BANKING SECTOR...................................................................................................... 8 PORTERS FIVE FORCES MODEL............................................................................................8 REGULATIONS:..............................................................................................................14 KOTAK MAHINDRA BANK THE BUSINESS MODEL ......................................................................17 INTEREST REVENUES: -....................................................................................................17 OTHER INCOME SOURCES.....................................................................................................26 PRIMARY DEALER (NOW UNDER THE BANK) AND INVESTMENT BANKING UNDER KOTAK MAHINDRA CAPITAL COMPANY(KMCC)....................................................................................................... 26 STRESSED ASSET BUSINESS:..............................................................................................28 KOTAK SECURITIES:........................................................................................................29 KOTAK COMMODITIES .....................................................................................................31 ASSET MANAGEMENT .....................................................................................................31 KOTAK MAHINDRA OLD MUTUAL LIFE INSURANCE LTD...............................................................32 SWOT ANALYSIS............................................................................................................35 FINANCIAL INFORMATION......................................................................................................40 ................................................................................................................................. 44 ANNEXURES.................................................................................................................... 48 SHAREHOLDING PATTERN AS ON DECEMBER 31, 2006.............................................................48 INDIAN MUTUAL FUNDS INDUSTRY.......................................................................................50 THE INDIAN LIFE INSURANCE SECTOR...................................................................................55
12
Kotak Mahindra Bank | 4/10/2007
Kotak Mahindra Bank Introduction.

Kotak Mahindra Bank has a well-diversified business covering the commercial vehicle, consumer financing (cars, home and personal loans), capital market financing, corporate finance and asset reconstruction segments. The Kotak group also has a presence in car financing through Kotak Mahindra Prime Limited, now a 100 per cent subsidiary of the bank (after the exit of Ford Motor Credit Company from the earlier joint venture). The group has strong presence in fee based businesses linked to the capital markets such as investment banking through Kotak Mahindra Capital Company Ltd and in institutional and retail brokerage and portfolio management services through Kotak Securities Limited. Both companies are now ultimate 100 per cent subsidiaries of the bank after the buy out of Goldman Sachs from both the joint ventures by paying a consideration of Rs. 323 crore in March 2006. The Kotak group has a reasonable presence also in life insurance (through Kotak Mahindra Old Mutual, a 74:26 joint-venture with Old Mutual) and asset management (through Kotak Mahindra Mutual Fund). Kotak Mahindra Bank converted itself into a commercial bank (from its earlier constitution as a NBFC) in 2002-03 in order to provide a more comprehensive range of financial services to its customers. The bank is predominantly a retail bank with about 80 per cent of its assets in retail advances. On the corporate side, the bank is focusing on a feebased income strategy to cross-sell the basket of products and solutions available across the Kotak group. The group has a net worth of around Rs. 3,100 crore, employs around 9,600 people in its various businesses and has a distribution network of branches, franchisees, representative offices and satellite offices across 300 cities and towns in India and offices in New York, London, Dubai and Mauritius.
Group Structure
13
Brief History
The Kotak Mahindra Group was born in 1985 as Kotak Capital Management Finance Limited. This company was promoted by Uday Kotak, Sidney A. A. Pinto and Kotak & Company. Industrialists Harish Mahindra and Anand Mahindra took a stake in 1986, and that's when the company changed its name to Kotak Mahindra Finance Limited.
12
The Indian Financial Sector

Over the past years, financial sector reforms have been driven by a thrust towards liberalization and several initiatives such as liberalization in the interest rate and reserve requirements have been taken on this front. At the same time, the government has emphasized on stronger regulation aimed at strengthening prudential norms, transparency and supervision to mitigate the prospects of systemic risks. Today the Indian financial structure is inherently strong, functionally diverse, efficient and globally competitive. Some factors which contributed to shaping of Indian Financial Sector are Flexible exchange rates, Further trade liberalization in goods and services, Increases in the level of FDI and FII investment, Trade liberalization in financial services, Securitization, Increased mergers and acquisitions, rapid growth in services, the gradual integration of stock markets around the world. Post 2004, The Indian economy has been on a high growth path which has resulted in a booming Indian Financial sector.
Some of the salient Features of the Indian Economy which has resulted in the growth of Indian Financial Sector.
13
Indian economy is among the Top 5 economies of the world in terms of Purchasing Power Parity.
Consistent rise in GDP post 2004.
Rising Per Capita Income
The fiscal deficit of the Centre as a proportion of GDP has come down from 6.2% in 2001-02, to 4.1% in 2005-06 and was budgeted at 3.8% of GDP in 2006-07.
12
Services maintained its vigorous growth performance.
Government continued focus on Infrastructure. Banks will have a significant share even after funding from Internal accruals, Overseas borrowings and loans from other financial institutions.
Increasing Volumes in the Equity Cash and Equity Derivatives market.
Huge mobilization by the corporates from the Primary market.

13
And Above all, A working population base, 58% of the population is in the working age group of 15-59 years
Indian Banking Sector

Porters Five forces Model Threat of entry:
Existing firms have strong presence and recognition. The majority stake in Public sector banks is being held by the government of India. This reduces the credit risk for lenders and depositors to a considerable extent. Due to collapse of a few private sector banks (and even co-operative banks for that matter), creates a virtual barrier to entry for the private and foreign players. The industry is capital intensive, which acts as a barrier to entry. India is a fast growing nation and many foreign banks are coming here to reap benefit out of it, which is a big threat to existing banks. Further liberalization of banking sector for foreign participants is expected post 2009. A slew of banks are in the foray which include global biggies like Royal Bank of Scotland, Switzerland's UBS, US-based GE Capital and Credit Suisse Group. Access to distribution channels and economies of scales of established players in the market also increases barrier to entry. As we will see ahead that banking business model is a volume game. Reforms and policies of government are the major determinant for deciding the level of entry barrier in the Indian banking industry. Overall, entry barrier is moderate in this industry.
Bargaining power of buyers:
12
Bargaining power in this industry for corporates would largely depend on its credit ratings. Big corporate and companies who have big transactions between them as well as various services may have enormous bargaining power if their credit rating is high. Individual buyers (retailers) have good bargaining power due to immense competition among financial sector entities. Agricultural credit forms a reasonable part of a banks credit and due to government support (part of priority sector advances), customers of these segment have good bargaining power more so during good monsoons.
Bargaining power of suppliers:

High during periods of tight liquidity. Trade unions in public sector banks can be anti reforms. Depositors may invest elsewhere if interest rates fall. Main supplier of money in the banking industry is retailers and corporate. Bargaining power depends on the interest rate which is determines by the demand and supply of money in the market. Inter-bank market (money market) is also considered to be the supplier. In times when demand of money is high, costs of funds are high and vice versa. Bargaining power of the suppliers also depends on risk-return characteristics of the alternate investment products. A recent study conducted by CRISIL, explained that banks are facing tough competition from alternate investment sources like Mutual Funds, Equity, IPOs, Gold and Real Estate investments.
Threat of substitutes:
Substitutes for banks are local moneylenders and hundiwalas, financial companies and NBFCs. Local moneylenders and hundiwalas come under unorganized sector. Finance companies and NBFCs come under organized sector. Unorganized sector in India has vast coverage in small villages and towns but due to increasing network of banks and their reliability, the unorganized sector is decreasing its business. The cost of funds for banks is cheaper and therefore, can price its loans cheaper. Thus, overall power of substitute is less than moderate.
Competitive Rivalry
Banking industry has two things to capitalize on. One is economies of scale and other spread margin. For achieving economies of scale, a large market share is needed and due to number of players there is intense competition. Presence of many Indian and foreign banks and their strive for higher market share will increase the competitive rivalry among existing players. Due to a large number of players, the industry is seeing and can foresee a lot of
13
mergers and takeovers. Also, PSU banks are banking on their volumes and vast branch network make more money from lending activities. Private sector banks are offering various innovative products and variety of quick services lead to an inevitable marketing war between the banks.
12
Trends in the Banking Sector: The banking sector is the most dominant sector of the financial system in India. Significant progress has been made with respect to the banking sector in the post liberalization period. The banking sector has witnessed a revival in credit off-take from the nonfood segment in the last few years. The sound economic growth, upward migration of incomes and wider distribution to cover a larger proportion of the population is expected to increase the demand for retail loans in a significant manner. Also favorable demographic profile like 58% of the population estimated to be under 35 years, increase in upper middle/high income households, etc. are to be the main drivers for retail credit. In the medium term, stronger demand for credit from the corporate sector is also expected consequent to the resurgence of this sector. Earlier banks were seeing lower credit off take from corporates due to weak business sentiments and lower credit requirement due to improved operational efficiency by corporates. The next big trigger for the industry would be of consolidation. Though, private and foreign banks are likely to play a major role, public sector bank's participation can't be ruled out. Many of the public sector banks have already made their intentions clear for acquiring some suitable banks. Moreover large corporate houses have shown keen interest in foraying into the banking business once regulations on the same are relaxed. Also once the anomaly in voting right cap is removed, heightened M&A activity within the sector can be expected. Moreover public sector banks which have overseas presence are looking at organic growth in the international market. Public sector banks have been very proactive in their restructuring initiatives be it in technology implementation or pruning their loss assets. Windfall treasury gains made in the falling interest rate regime were used for writing off the doubtful and loss assets. Incremental provisioning made for asset slippages have safeguarded the banks from witnessing a sudden impact on their bottomlines. Retail lending (especially mortgage financing) formed a significant portion of the portfolio for most banks and the entities customized their products to cater to the diverse demands. With better penetration in the semi urban and rural areas the banks garnered a higher proportion of low cost deposits thereby economizing on the cost of funds. The financial health of the commercial banks has improved manifolds with respect to capital adequacy, profitability, asset quality and risk management.
13
Apart from internal usage of technology to streamline processes, the Indian banking system is in the midst of a technological revolution as far as customer offerings are concerned. Banks are offering value added services including ATMs, telephone banking, online banking, web-based products, call centers, etc which have become increasingly popular. There has also been significant restructuring on the part of public sector banks that have begun the implementation of technology at a very fast pace. Further, deregulation has opened new opportunities for banks to increase revenue by diversifying into investment banking, insurance, credit cards, depository services, mortgage, securitization, etc. Liberalization has created a more competitive environment in the banking sector. The aggregate foreign investment (FDI plus FII) limit for the private sector banking has been raised to 74 percent. The competition has increased within the banking sector (with the emergence of new private banks and foreign banks) as well as from other segments of the financial sector such as mutual funds, Non Banking Finance Companies, post offices and capital markets. The approval for banks to raise capital by way of Tier III perpetual bonds and hybrid capital gave the entities an opportunity to enhance their capital adequacy ratios before the Basel II compliances, without diluting promoter stake or taking in additional interest burden. The option of hybrid capital is seen to be increasingly leveraged by banks going forward to sustain their credit growth. Upward re-pricing of assets, lower treasury risks and no foreseeable impairment in asset quality paint a positive outlook for the sector going forward. Nevertheless, the concerns with respect to structural issues (autonomy to PSU banks, Basel II compliance) continue to linger.
12
Banking Business Model
The primary business of a bank is to accept deposits (current, savings and term deposits) from their branches and lend short term and medium term loans. Long term loans are generally avoided by banks due to Asset Liability mismatch and also interest rate risk. However, banks do lend long term with interest rate resets build in the loan agreement. Bank accepts deposits from households and has to pay interest on these deposits. The bank then uses these deposits to lend loans for which it charges interest from the corporate and retail borrowers. Banks pay negligible interest on current account deposits, 3.5% on savings account deposits. Interests on term deposit depend on the prevailing interest rate which is determined by the demand and supply of money in the market. On the other hand, Banks lends to corporates and retail borrowers based on the prevailing interest rate structure, demand and supply of credit in the market, the risk involved determined by the internal and external credit risk appraisal mechanism etc. banks thus have an advantage over other financial institutions, non-deposit taking NBFCs in the form low cost deposits mobilized by the banks better known as CASA deposits or current and savings account deposits. However, banks make notional interest losses as they cant lend the whole amount as per their discretion. Because of regulatory reasons, they have to keep reserve cash of 6.5 %(Incl. recent CRR hike of 0.5%) of net demand and time liabilities with RBI at very low rates of 0.5%. Also, 25% of this NDTL is to be invested SLR securities which include risk free government securities, Tbills etc. these are risk free, and are serviced by the government at a comparative lower rate of interest than that earned on the corporate and retail loans. Not only
13
this, of the remaining 68.5%, 40% of this amount has to be with the priority sector and then the remaining amount is available to the banks to lend to the corporate and retail consumers. This means that bank really works on low margins and this makes banking business model a volumes game. This narrow interest margin has to backed by high volumes to make money in the banking business. Also, banks profitability and stability depends considerably on its ability to generate low cost deposits so as to have low cost of funds and also strong credit appraisal system so that loans dont get into the category of non performing assets. The various components of a banking business model are explained as follows:
* Break up of Rs. 100 deposited with banks. Particulars a. b. c. d. In CRR (Pre empted by RBI) In SLR Priority sector lending 40% Rs. (100 31.5) Commercial lending Total Amount (Rs.) 6.50 25.00 27.40 41.10 100.00 Nature and yield Currently Interest rate received will be at 0.5%. Yield (used to deficit financing of Central Government) Agricultural lending. Higher NPA risk. Bank use its freedom.
Regulations:
The credit in the economy has to be controlled & monitored at every stage as excess bank credit is one of the main reasons for inflation in the economy. The important changes or measures taken by RBI through monetary policy can be broadly divided into two groups: a) General Credit Controls b) Selective Credit Controls GENERAL CREDIT CONTROLS The general credit controls are quantitative credit controls, which maintain proper quantity of credit or money supply in the market. a) Bank Rate: The bank rate is the rate at which RBI lends money to commercial banks. Over the years, the bank rate has been reduced. In April 2005, the bank rate was maintained at 6% per annum Bank rate acts as a guideline to the banks for fixing interest rates.
12
b) Open Market Operations: This involves purchase and sales of government securities. The open market operations enable to balance money supply in the economy. Through purchase of government securities from banks and FIs, the stock of securities with the seller bank is reduced and there is increase in cash with them for lending. Through sale of government securities, it reduces the cash with the banks for lending. c) Cash Reserve Ratio (CRR): The CRR also affects money supply in the economy. It is the ratio or percentage of a banks deposits to be kept in reserve with RBI. A high CRR reduces the cash for lending, and a low CRR increases the cash for lending. The CRR has been brought down from 15% in 1991 to 5% with effective from Oct 2004. As of Today, the CRR is at 6.5%. d) Statutory Liquidity Ratio (SLR): Under SLR, the government has imposed as obligation on the banks to maintain a certain ratio of its total deposits with the RBI in the form of liquid assets like cash, gold, and other securities. The SLR has been reduced from 38.5% in 1991 to present level of 25%. The reduction in CRR and SLR improves liquidity if the banks to lend more money in the money market.
e) Deployment of Credit: Various measures have been taken by RBI to deploy credit to various sectors of the economy. For this a certain percentage of credit has been earmarked. For example, 40%(32% in case of foreign banks) of the total net bank credit has been earmarked to the priority sector at low interest rates. Low interest rates have been fixed for supply of credit to agriculture and to export sector as well as to other sectors in the priority list. SELECTIVE CREDIT CONTROLS Selective credit controls have been taken to control money supply or credit, i.e. either to increase of decrease the money supply to specific purposes. Such controls
13
the flow of money into unproductive channels or purposes. The selective controls are: a) Ceiling on the Level of Credit: The ceiling on the level of credit restricts the lending capacity of a bank to grant advances against certain commodities or securities. b) Margin Requirements: The RBI imposes minimum margin requirements, which vary from 10% to 80% for lending against securities or commodities. Margin against a particular security is decreased or increased in order to encourage or discourage the flow of credit to a particular sector. c) Directives: The RBI issues directives to banks regarding advances. Directives are issued in the following aspects: Minimum margin requirements against securities Maximum limit on advances to borrowers The percentage of CRR and SLR Minimum lock-in period, etc. The RBI takes necessary action on those banks, which fail to comply with its directives, such as refusal to rediscount bills or cancellation of license. d) Moral Suasion: Under moral suasion, the RBI issues periodical letters to banks to exercise control over credit. Such periodical letters act as a reminder to the banking sector to follow credit control norms. Thus, the credit in the country has been deployed in various sectors & helped in the overall development of the nation.
12
Kotak Mahindra Bank The Business Model
Having looked at the profile of the banking sector in brief, lets now understand the business model of Kotak Mahindra Bank.
Operating profits in banking would mean Net Interest Income.NII is essentially the difference between the banks interest revenues and its interest expenses. This parameter indicates how effectively the bank conducts its lending and borrowing operations (in short, how to generate more from advances and spend less on deposits).
Interest Revenues: Interest on loans: Since banking operations basically deal with interest, interest rates prevailing in the economy have a big role to play. So, in a high interest rate scenario, while banks earn more on loans, it must be noted that it has to pay higher on deposits also. But if interest rates are high, both corporates and retail classes will hesitate to
13
borrow. But when interest rates are low, banks find it difficult to generate revenues from advances. While deposit rates also fall, it has been observed that there is a squeeze on a bank when bank rate is soft. A bank cannot reduce interest rates on deposits significantly, so as to maintain its customer base, because there are other avenues of investments available to them (like public savings scheme, mutual funds, equities,). Since a bank lends to both retail as well as corporate clients, interest revenues on advances also depend upon factors that influence demand for money. Firstly, the business is heavily dependent on the economy. Obviously, government policies (say reforms) cannot be ignored when it comes to economic growth. In times of economic slowdown, corporates tighten their purse strings and curtail spending (especially for new capacities). This means that they will borrow lesser. Companies also become more efficient and so they tend to borrow lesser even for their day-today operations (working capital needs). In periods of good economic growth, credit offtake picks up as corporates invest in anticipation of higher demand going forward. Similarly, growth drivers for the retail segment are more or less similar to the corporate borrowers. However, the elasticity to a fall in interest rate is higher in the retail market as compared to corporates. Income levels and cost of financing also play a vital role. Availability of credit and increased awareness are other key growth stimulants, as demand will not be met if the distribution channel is inadequate. Interest earned from can be from A) B) Credit to Agricultural Sector. Credit to Non-agricultural Sector. (Industrial & Service Sector)
Credit to Agricultural Sector: Commercial banks provide funds to agricultural sector for undertaking productive farm activities. Agricultural credit, which forms about 11 per cent of non-food credit,
12
plays an important role in poverty alleviation and creation of employment by promoting agricultural and related businesses. Apart from direct finance to farmers, agricultural credit also consists of lending to allied farming activities, subscription to bonds issued by NABARD, loans to cooperative marketing societies, and loans to co-operative banks of producers. Credit to agriculture is a part of priority sector lending prescribed for SCBs. Domestic SCBs and foreign banks are required to extend a minimum of 40 per cent and 32 per cent, respectively, of their net bank credit to the priority sector with sub-targets for lending to various sectors. For domestic SCBs, the sub-target for lending to agriculture is 18 per cent of net bank credit, while there is no specified target for foreign banks. With a view to focus on the agricultural sector, the Bank has a full-fledged agri business division which has the required expertise and offers a range of project finance and working capital funding to meet the financing requirements of agricultural machinery, horticultural projects, storage warehouses and farmers implementing new farming techniques. Credit to non-agricultural sector: Corporate Lending: Banks have a great opportunity of increasing lending to this sector as one of the problems of this sector has been lack of funds. This As stated earlier, banks accept deposits from the public & deploy it for various purposes, one of them being providing various types of finances to industrial & service sector. Banks have come up with various facilities like Cash-credit, Bank Overdraft, Letter of Credit, Long term Loans, Working Capital Loans, Venture financing, Export Credit etc. a) Cash Credit & Overdraft: - It is an arrangement whereby customer is allowed to advance up to a certain limit against credit granted by banks. Bank overdraft is a facility whereby customers are allowed to withdraw in excess of credit balance standing in their Current Deposits a/c. There is no difference between Cash Credit & Overdraft as such, but at times Cash credit indicates regular limit fixed by the bank & the overdraft indicates a casual debit balance allowed temporarily to a current a/c holder. This credit is normally given to meet the working capital requirements & other short term requirements of the industrial & service sectors. This facility is given against security of goods against pledge or hypothecation. b) Long Term Loans:- As the name suggests, this financial assistance is for long period & is meant for meeting infrastructural needs of the business like buying of machinery, purchase of land etc. In this case, bank accepts securities like shares, Government Securities, Life Insurance policies, FD receipts, etc.
13
c) Bills discounting:-It is a type of advance given by banks under which the drawer of the bill can get the bill drawn by him on his debtor, encashed before due-date by paying certain percentage of the amount of the bill as commission to the bank. Thus, customer is able to get financial credit on urgent basis, before due-date. d) Letter of Credit:-It is an arrangement made at the request of the client of the bank called as applicant under which the bank addresses a letter to the seller called as beneficiary undertaking to accept, negotiate or make payment of the bills drawn by him on the applicant on the production of documents as stipulated in the credit. Thus, here bank guarantees the creditworthiness of the customer, which thereby, helps in expansion of his business. e) Export Credit:-This is assistance provide by banks to enhance export trade of the country. This is given in form of `Pre-shipment finance & `Post-Shipment Finance. Thus, banks, in its various forms have helped the industrial & service sector to cope up with their financial problems which is clearly visible through the growth of industrial sector in our country. Banks in this segment have faced competition from other financial institutions, greater reliance on internal resources, funds from the capital market, overseas borrowings. However, given the macro-economic condition, there is enough credit need that will have to be met by the banking system. Sustaining the GDP growth rate wont be possible without the increment credit provided by the banks. Small and Medium Scale Enterprises: Small and medium enterprises (SME) are likely to be the key drivers of this growth, as the initial phase of the uptick in the capital expenditure cycle appears to be spurring greater borrowings from SMEs. Traditionally, SMEs in the past have always lacked adequate access to capital market and bank finance. Banks have been hesitant to lend to this sector because of the historical high levels of NPL levels in the Loans to the SSI segment. However, SMEs as a segment are much broader than SSIs and offer a viable deployment avenue for banks. Infact, some of the private sector banks have already started lending aggressively to this sector. Also, risk can be better gauged with the advent of credit rating of SMEs done by credit rating agencies. This help banks better price credit risk and generate high risk-adjusted returns. Eighty percent of Kotaks loan portfolio is retail. The corporate profile is restricted to the SME segment. Kotak, like most other banks provides a broad range of financial services to domestic and international corporations, financial institutions, and government entities. The Banks services include working capital, trade services, transaction banking, money market and foreign exchange services offered to corporates and small and medium enterprises (SMEs). The Bank offers the entire
12
range of debt and fixed income products with a team of experienced and highly qualified professionals who structure products to suit the dynamic and varied needs of customers across segments. The Bank offers a variety of products from plain vanilla debt issuance to Asset Backed Securities (ABS), Mortgage Backed Securities (MBS), structured products and loan syndication. The Banks strength lies in its ability to customize instruments/structures develop innovative products and then deliver these through high level of execution capabilities. Retail Lending Retail finance is one of the fastest growing segments for Indian Banks .It consists of over 30% of the average system advances. Housing loans, Educational loans (For Public Sector Banks), Auto Loans, Personal Loans, retail trading loans are some of the product offered in the banking sector. Retail Housing forms about half of all incremental loans disbursed by the Indian Banking sector. Housing demand is expected to remain given the persistent demand-supply gap in this sector. Despite stiff competition and thin margins, lending to the retail sector has remained viable for the banks due to low NPL.s, better risk adjusted returns, and increased operating efficiencies. Major drivers of this Retail credit are Continued growth in housing finance; Strong growth in personal loans and credit card businesses; Increasing market share of banks; and Increasing tenures of loans. Change in Indian Mindset towards debt. Increase in ability to afford a loan. Nuclear Family and therefore increase in need for housing, personal loans. Existing customer relationships (Saving account holders) in case of banks.
As mentioned before, 80% of banks loan portfolio is retail. This mix enables it to earn higher margins than its peers as it retail assets are high yielding ones. It aims to build its high-yield asset book, with limited exposure in the home loan segment. The Bank continues to leverage its experience in the field of retail lending business and has shown a robust growth in disbursements and advances in this area. Housing Loans: Kotak provides housing loans to salaried individuals, Self Employed non-professional (SENP). It also provides Loans against property, Loans to commercial property i.e. loans to shop owners, Balance transfer. The housing loan department is divided into three categories: Credit appraisal, sales, Legal and Technical. Loans are sourced by the sales department. They are they appraised by the credit appraisal department with the help of legal and technical department. The legal and technical department of Kotak is in-house and not outsourced as in case of few other banks. Kotak is very
13
conservative and cautious while sanctioning housing loans. Only if all the requirements are fulfilled, The loan will be disbursed. Also, the loan to Security value is also kept at less than one, while is far less than the industry. Kotak therefore has very good asset quality and thus the chances of loans defaulting in this segment are very less. Kotak also does not give fixed interest loan currently and disburses on Floating Rate loans. The Interest rates charged by Kotak in the various categories is as follows: Housing Loan Segment Interest Rate Loans against Commercial 12-15% property Loans to salaried employees 10.75% Loans to Self employed Non- 10.75 11.5% Professional The market leaders in this segment are ICICI Bank, HDFC, and SBI. Also, the interest rate charged by SBI is approx. 9.5% whereas that of HDFC is around 10.25. ICICI Bank currently is not disbursing below 11.0%. ICICI bank also has better products than Kotak. For eg. ICICI sanctions loans against sanction letter of other banks or Housing finance companies. They believe in the credit appraisal done by other banks/HFCs and also give a discount of 0.25% as they have saved on their time and cost which they would have incurred it carrying out the appraisal themselves. The Bank has witnessed significant traction in some of the newer products like home finance, agri-finance and Saral. Saral loans which are essentially targeted at asset backed lending to customers, where organized credit does not reach easily, expanded its scope during 2005-06 to prime category of customers through business loans with or without asset backed security. Prior to being converted into a bank, the KM group was an NBFC, focusing on commercial vehicles, automobile and personal loans. In FY06, KMB had a loan book worth Rs 63bn, and saw a 58% yoy growth. KMB directly does not have presence in passenger car loan segment. Passenger car financing is done by its subsidiary Kotak Prime. Car Finance. (Done by Kotak Mahindra Prime Ltd)
Profile: Kotak Mahindra Prime Limited (KMP) is a car finance company, engaged in retail financing of new and used passenger cars, multi-utility vehicles through loan, hire purchase and lease contracts and inventory and term funding to car dealers. In October 2005, the Kotak Mahindra Group ownership in KMP increased to 100% following the acquisition of 40% stake held by Ford Credit International (FCI). Subsequently, in February 2006, KMP also bought the entire retail car finance portfolio of Ford Credit Kotak Mahindra. During the year the company undertook new initiatives and renewed its focus on fee based income. The Company started financing against securities, acquired a retail car portfolio, entered into securitization and assignment transactions and also acquired non performing assets.
12
The passenger car market in India saw a growth of 6% for 2005-06 as compared to a growth of 18% for 2004-05. Total unit sales of cars and Multi-Utility Vehicles crossed 11 lakh units in 2005-06. The car market has grown at a rapid pace due to robust economic growth, launch of new and improved models, stable automotive prices and relatively lower interest rates. The year 200506 witnessed the final consolidation phase in the car finance industry. KMP has carved out a niche for itself in the car-financing segment by focusing on distribution and relationship management across manufacturers, dealers, channel partners and customers. Customer knowledge and easy accessibility through its wide network of 51 branches (including satellite branches) and a firm commitment to deliver superior customer service are the key drivers for KMPs performance. The Car Finance model is different from the Housing Loans model as the ticket size and the tenure is normally less than that of Housing loans. This makes it less sensitive to the rising interest rate environment. Also, Prepayment risk is less due to short tenure of the loan. Kotak only disburses fixed loans in the car finance market as the tenure of loan is normally for a maximum period of 5-7 years. Also, Post exit of Kotak Mahindra Bank from Ford Credit Kotak Mahindra, KMPL can now finances ford cars also.
Interest on Investments and deposits with the RBI: The banks interest income from investments depends upon some key factors like government policies (CRR and SLR limits) and credit demand. If a bank had invested in G-Secs in a high interest rate scenario, the book value of the investment would have appreciated significantly when interest rates fall from those high levels or vice versa. The financial markets witnessed considerable volatility in 2005-06. The Bank had anticipated a secular uptrend in the interest rates in 2005-06 on the back of monetary policy tightening by the RBI. Consequently, the modified duration of the banking book was restricted to an average of marginally over one year through the year. Bank Treasury also focuses on garnering client flows from derivatives and foreign exchange remittances as such client flows provided stability to treasury income amidst a volatile fixed income and foreign exchange market. The Bank Treasury continued its endeavor of diversifying revenue sources. The Company has commenced operations in the bullion desk and custodial services. Gold Eternity is the latest offering from Kotak Bank which further adds to their bouquet of investment products. Available in an attractive tamper-proof pack, Gold Eternity bars come in 50gms and 100 gms weightages. These are manufactured in Switzerland by PAMP, one of the worlds premier gold refiners. The biscuits carry 99.99% Assay certification, signifying highest level of purity as per international
13
standards. Gold coins is a good hedge against other asset classes, has highest penetration among other products. It also helps the banks as investment in gold coins is counted towards SLR requirement.
Interest expenses:
A banks main expense is in the form of interest outgo on deposits and borrowings. This in turn is dependent on the factors that drive cost of deposits. If a bank has high savings and current deposits, cost of deposits will be lower. The propensity of the public to save also plays a crucial role in this process. If the spending power for the populace increases, the need to save reduces and this in turn reduces the quantum of savings. Deposits: Banks fund their lending operations primary through deposits: Deposits with SCBs are classified into three categories: Current Deposits: -Current deposits are maintained by the business class to meet short term contingencies. No interest is payable by banks on such deposits. Savings Deposits: -Savings deposits are deposits maintained by the households. RBI administers the interest rate offered to such depositors which is currently at 3.5% Time Deposits or term deposits: These deposits are generally paid at the end of a fixed period. Interest rate depends on the demand for credit in the economy. Generally, term deposits constitute 60 to 65% of the total deposits. The ability of a bank to mobilize deposits depends considerably on the number of branches. Banks are today running for branch expansion and acquiring weak banks for reasons well known such as access to low cost deposits and branch network. Today, even ATMs have acquired significant importance in garnering deposits. Many banks are sharing their ATM network to maximize their reach to depositors. Also, Branch network helps banks to cross sell a variety of services to the depositors. Banks are facing increasing competition from alternate source of investments like mutual funds, equity markets, post office savings, life insurance policies, gold, real estate etc. Banks therefore, provide various value added services to these customers so as to garner maximum deposits.
12
Kotak being a young bank is on a branch expansion spree. Kotak recently opened its 100th branch. It is worthwhile to note that Kotak Mahindra Bank has reached the 100th branch landmark in shortest time for any private sector bank in India in less than four years. By the end of FY07, it aims to have 110 branches across the country and add another 200 by CY08. Selection of a branch is done based on IPO and wealth management data. The bank looks for cities from where there are high subscriptions for IPOs. It takes about 18-24 months for a semi-urban branch to break-even. A mainstream branch would cost Rs.75 lakhs to the bank, whereas a semi urban branch will cost Rs.25 lakhs. The CASA deposit has been continuously growing (19% in 2006), though much below the industry levels. This is expected to improve further as the no of branches accelerate. Inorder to attract more customers, the Bank offers a very wide range of products and services targeted at retail customers, delivered through a state of the art technology platform. In addition to branch banking, the convenience banking facilities offered by Kotak Mahindra Bank include telephone banking, internet banking, mobile banking, direct pay services, payment gateway for online shopping, a Global Debit Card which allows certain customers free access at any Visa ATM in India or abroad, and Kotak Visa Money Transfer, which permits the transfer of funds to all Visa debit and credit cards in India. As a part of its platform, Kotak Mahindra Bank offers depository services that allow customers to hold equity shares, in electronic or dematerialized format. Another product offered by Kotak Mahindra Bank is the Best Compliments Card, a prepaid spending card accepted at over 150,000 merchant establishments in India, at all establishments which accept Visa credit cards. The Bank provides tailored investment services to individual and institutional clients in various stages and economic cycles. The focus is to attract, retain and deepen customer relationships through enhanced contact mechanisms. In addition to the existing focus on the mass affluent segment, the
13
Bank plans to increase customer acquisition in the middle and lower end of the pyramid through personalized wealth advisory services. Distribution of investment products is a good business proposition as the whole MF, life Insurance and other investment products dynamics is favored towards distributors. Selling Insurance is the key contributor of distribution income. Kotak intends to get into selling of third party life insurance products. Generally the commission earned on such schemes/product distribution is around 2%. Anything above that depends on the market situation. With the opening up of new branches and their subsequent breakeven, Kotak will have long term, low cost and stable deposit base.
Other Income sources

Primary Dealer (now under the bank) and Investment Banking under Kotak Mahindra Capital Company(KMCC)
Profile: KMCCs business consists of two main parts - (a) Franchise business (fee based), conducted under the trade name of Kotak Investment Banking, and (b) Principal business (fund based). KMCC is a full service Investment Bank and an approved Primary Dealer (PD). In May 2006, Kotak Mahindra Group ownership in Kotak Mahindra Capital Company (KMCC) increased to 100% following the acquisition of 25% stake held by Goldman Sachs (Mauritius) LLC. The core activities of a Primary Dealer include dealing, underwriting and broking services in G-Sec, corporates, PSUs, FI bonds or debentures, dealing in interest rate derivatives, leading in the call/term/repo/CBLO market, investing in Commercial paper, certificate of deposits, security receipts and debt mutual funds. Non Core activities of classified by the RBI circular feature investment or trading in equity and equity derivatives market, investment in units of equity oriented mutual funds, underwriting public issues of equity, M&A advisory, portfolio and private equity management services. RBI has now allowed banks to run Primary dealership business departmentally. Besides the savings in capital running the PD business as a department entitles the bank to utilize the securities purchased through primary dealership activities as part of statutory liquidity ratio requirement. Primary dealership is a unidirectional business model. Income from the PD business will depend on the direction of interest rates. In an upward interest rate scenario, Primary dealers tend to make losses and gain in an downward interest rate scenario. Even, Income from Investment banking activity is cyclical. Investment banking will depend a lot on the state of the equity markets. A booming stock market will see an increase in the money mobilized in the market. However, If the stock markets are not doing well, It is not easy to mobilize money from the market and hence the dearth of revenues for the company from this segment during downward trend in the equity markets. Inorder to hedge this cyclical income, Employees of such companies have a high proportion of variable pay. This helps is
12
reducing losses during bad times as employee expenditure forms a significant portion of their revenues. Also, In terms of the Fiscal Responsibility and Budget Management Act, 2003, the Reserve Bank is prohibited from participating in the primary issuance process of Central Government securities from April 2006. In this context, effective institutional arrangements are required to ensure that debt management objectives are met and that the Government is able to borrow under all market conditions without exacerbating market volatility. Since the Reserve Bank can no longer act as the underwriter of last resort, the responsibility of ensuring full subscription to the primary issuance has fallen upon the primary dealers (PDs). The Reserve Bank has, therefore, been working towards enabling the PDs to cope with interest rate cycles by giving them greater flexibility in operations. The multi-pronged approach in this direction includes measures such as allowing intra-day short sales in Government securities; introduction of when issued trading; allowing PDs to diversify their activities and generate alternative streams of income; revamping the system of underwriting; and allowing financially healthy commercial banks to undertake PD activity. It is expected that such steps would enhance the market making role of PDs and enable them to make the Government securities market more efficient as well as widen the investor base.
Business: As a result of the buoyancy in the equity markets and the general economic boom, Investment Banking revenues including Mergers and Acquisitions have registered a record growth. The financial year 2005-06 had one of the largest number of equity issuances with 102 (previous year 29) public issues. The PD business clocked a turnover of Rs. 78,194 crore in 2005-06 as compared to Rs. 50,398 crore during the previous year 2004-05. The Trading and Principal Investment business substantially includes a one time gain on account of sale of economic interest in Hutchison Essar Limited. Principal income other than this one time gain also recorded a huge increase over last year largely due to investments in equity and equity mutual funds. Kotak Investment Banking topped the Domestic IPO League tables as Book runners for the fourth year running (Source: Prime Database). Kotak Investment Banking also topped the M&A league tables for calendar year 2005 (Source: Bloomberg and India Advisory Partners). Kotak Investment Banking conducts its activities principally through KMCC, and also through its international subsidiaries Kotak Mahindra (UK) Limited, Kotak Mahindra (International) Limited and Kotak Mahindra Inc. KMCCs international subsidiaries acted as global co-ordinator and book runner to five GDR transactions during the year, establishing KMCCs positioning as one of the top 5 investment banks for follow-on offers including GDRs. Kotak Investment Banking was ranked no. 1 in league tables for book runners/lead managers in public equity offerings during 2005-06. Kotak Investment
13
Banking managed 16 public issues during 2005-06 raising an amount of Rs. 14,852 crore, out of a total of Rs. 23,674 crore (Source: Prime Database). The issues included large equity offerings such as Oriental Bank of Commerce, IDFC, ICICI Bank, Punj Lloyd and Bank of Baroda. Kotak Investment Banking acted as Advisor to the Government of India in the divestment of 8% equity in Maruti Udyog valued at US$ 355 million, a transaction with no parallel in the Indian capital markets in terms of structuring and pricing. Kotak Investment Banking topped the Bloomberg M&A League Tables and was involved in the following publicly disclosed notable transactions: Exclusive advisor to Hutchison Essar for its acquisition of the cellular business of BPL and Essar Spacetel (Transaction value US $ 1.1 billion) Exclusive financial advisor to GE Shipping on the demerger of its Offshore business (Transaction value US $ 150 million) Expansion of capital through preferential issue and open offer by Anil D. Ambani and his associates to shareholders of Reliance Capital Limited (Transaction value US $ 956 million) Financial Advisor to Bilakhias for US$ 303 million transaction which included acquisition by Hubergroup of a majority stake in Micro Inks and Kotak Investment Banking acting as Manager to the mandatory open offer launched by Hubergroup. Exclusive Domestic Advisor to Thomas Cook AG in the US$ 92 million transaction for divestment of controlling stake in Thomas Cook (India) Limited to Dubai Financial LLC. Advisor to Bain Capital on its indirect acquisition and tender offer to the shareholders of FCI OEN Connectors Limited (Transaction value US$ 55 million)
Stressed Asset business:

Asset reconstruction business is one of the key focus areas of the Bank, and the Bank has a pre-eminent position in the industry. The Bank purchases distressed assets and portfolios from other banks and financial intermediaries and helps in the resolution of the non performing loans. The Bank has made significant investments in buying stressed asset portfolios, the economic benefits of which will accrue over the next few years. Risk level is high but the returns are great. Salient Features of this business are as follows: Generally SME category loan purchases Economies and units are getting viable. Therefore it makes sense in these non performing units. Some NPA do have good hard collateral in the form of property and land. This makes it a very good proposition as property prices have gone up significantly. Most sellers want Cash and not security receipts (SRs) as given by ARCIL. Hence they would prefer selling it to a Kotak or any other bank rather than to ARCIL. Debt Aggregation. Many companies are disbursed their total requirement of loans by a consortium of banks. When the unit turns weak, these individual banks may not have the bargaining power due to less individual loan. For that
12
matter, Kotak can purchases NPA from various banks, increase its stake thereby have a majority stake. It can then use SARFESI Act to recover loans. It takes about 12-18 months to recover the principal and then profits can be made.
Kotak Securities:
Profile: Kotak Securities Ltd. is India's leading stock broking house with a market share of around 8.5 % as on 31st March, 2006. Kotak Securities Ltd. has been the largest in IPO distribution. In its individual investors division, Kotak securities, provides with broking and research services to Individual Investors. On the other hand, the institutional business division, brings A Kotak Securities Electronic Search service (AKSESS), primarily covers secondary market broking. It caters to the needs of foreign and Indian institutional investors in Indian equities (both local shares and GDRs). The division also has a comprehensive research cell with sectoral analysts covering all the major areas of the Indian economy. Kotak Securities has 195 branches servicing more than 2,20,000 customers and a coverage of 231 Cities. Kotaksecurities.com, the online division of Kotak Securities Limited offers Internet Broking services (in Equity, Derivatives) and also Insurance, online IPO and Mutual Fund Investments. The portfolio Management Services provide top class service, catering to the high end of the market. Kotak Securities Limited manages assets over 2500 crores of Assets Under Management (AUM). The company has a full-fledged research division involved in Macro Economic studies, Sectoral research and Company Specific Equity Research combined with a strong and well networked sales force which helps deliver current and up to date market information and news. Kotak Securities Ltd is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL).
Kotak Securities (retail, online and institutional segments) clocked average daily volumes of over Rs 4040 crore during Q1FY07 as compared to around Rs 1460 crore during Q1FY06. Average daily volumes for FY06 were Rs 2440 crore. Average daily volumes on www.kotaksecurities.com (online) during Q1FY07 increased to Rs 470 crore from Rs 140 crore during Q1FY06. Average daily volumes for FY06 were around Rs 250 crore. AUM in Portfolio Management Services (PMS) was Rs 2090 crore as on June 2006 (Rs 2080 crore as on June 2005). Kotak Institutional Equities continues to maintain the fast pace of growth in revenues. Q1FY07 has seen the division increase its institutional client base, reach and research coverage. The division has also achieved record growth in volumes and market share in the F&O segment. Kotak Securities has a network of over 746 offices (own & franchisees)
13
across 249 cities and towns and services over 245,000 secondary market customers. India has a long tradition of functioning capital markets. The Bombay stock exchange is over a hundred years old and the volume of activity has increased in the recent years. The process of reform of capital markets started in 1992 and aimed at removing direct government control and replacing it by a regulatory framework based on transparency and disclosure. The first step was taken in 1992 when SEBI was elevated to a full-fledged capital market regulator. An important policy initiative in 1993 was the opening of capital markets for foreign institutional investors and allowing Indian companies to raise capital abroad. FII registrations in the country have gone up significantly over the years. The number of registered FIIs has gone up from 823 in December 2005 to 972 in October 2006. FIIs had made $10.7 billion worth of investment (Rs 47,181 crore) in calendar 2005. The FIIs have been rewarded well by attractive valuations and increasing returns. The depository and share dematerialization systems have been introduced to enhance the efficiency of the transaction cycle. A number of significant reforms have been implemented in the spot equity and related exchange traded derivatives markets since the early 1990s. For instance, spot prices are mostly market-determined, trading volumes in the derivatives market exceed those in spot markets and market practices such as speed of settlement and dematerialization are close to international best practices. The retail area has tremendous growth potential. A study conducted by the Boston consultancy group(BCG) shows that managed assets in India is expected to grow by 22% per annum touch more than $1 trillion by 2015. Almost 40% of this growth is coming through MFs. The market for MFs alone is expected to tough $520 billion in the next 10 years. Broker dont fear whether the investment in the market is going to come through MFs or Direct trading. The idea is to attract the retail investor and keep him with the firm so that one can sell him any kind of financial product that exists in the market. Indias Low penetration in financial products is driving brokerages to the retail market. Countries with more than a billion people have only 55 lakhs demat account. Also, the country has a young population and a growing GDP that will help the retail business of the brokers. However, there are a few challenges before brokerages plan for occupying the retail space. Retail investors will continue to trade in the market as long as the market is not volatile and maintains a steady growth rate. All in index means disaster for the retail business in general and online trading in particular. Since revenues are linked to index growth, broking arms also face a lull phase when markets are lack luster or in a bear phase. As the market heats up for competition, players who have deep pockets to invest in building a credible consumer brand, invest in technology, and a large distribution and customer service reach probably will win the battle. Also, the institutional side
12
is expected to see much more activity. Regulators and the government are contemplating to allow more participation from the pension fund, provident fund, Hedge funds and other big players. Winning business from these players depend mainly on research quality and service and not on pricing.
Kotak Commodities
The total value of commodities derivatives trade in India has shot up spectacularly from merely 5.81 per cent of the gross domestic product at current prices in 200304 to 20.14 per cent in 2004-05 and nearly 66 per cent in 2005-06. The turnover in the commodity derivatives market for the FY2006-07 was 37 lakh crore. This has been achieved without significant institutional participation from FIIs, banks, mutual funds. An Assocham study predicts the future market turnover to be Rs.100,00,000 crore by 2010. This segment offers attractive opportunity for Kotak to leverage its existing brand name and capture significant share in this segment.
Asset Management Kotak Mahindra Asset Management Company and Kotak Mahindra Trustee Company
An Asset management company basically pools money from investors, invests it in the capital market and other asset class, generates returns and distributes these returns back to the investors after deducting fund management charges. The opening up of this sector has seen a number of players setting shops in this industry. Making money in this business depends a lot on launching innovative products, widespread distribution/ reach to the investors and providing superior returns. This also makes the mutual fund industry depend on the state of the capital market. It can be observed that when the stock markets are booming, fund managers are able to provide superior returns. Hence, Revenues from this business will make it dependent on the state of the capital market. Downturn in the revenues may follow with a downturn in the equity markets. Asset management is not a significant contributor in revenues to Kotak Mahindra bank, but has a good potential going forward. From the investment market point of view, growing income levels provide a great opportunity. However, the savings and investment pattern of Indian investors is highly skewed in favor of fixed income savings rather than market linked investment. This trend is expected to change with strong market intermediaries like mutual funds playing a significant role in facilitating retail investors to participate in market linked investments and relatively lower interest rate environment. Indian mutual fund industry is evolving, in terms of breadth and depth. It is broadening in terms of total number of investors it is catering to and deepening in terms of its product offering and investment and distribution practices.
13
Profile: Kotak Mahindra Asset Management Company Limited (KMAMC) and Kotak Mahindra Trustee Company Limited (KMTC) are wholly owned subsidiaries of Kotak Mahindra Bank. KMAMC is the asset manager of Kotak Mahindra Mutual Fund (KMMF) and KMTC is the trustee company.
Assets under Management (AUM) of Kotak Mutual crossed Rs. 10,000 crore mark. As on March 31, 2006 the AUM had increased by 57% to Rs. 10,408 crore from Rs. 6,649 crore as on March 31, 2005. The equity AUM grew by 143% to Rs. 3,130 crore as on March 31, 2006 from Rs. 1,289 crore as on March 31, 2005. Kotak Mutual witnessed a substantial growth in its investor base from 200,000 investors in 200405 to around 436,000 investors in 2005-06. This was achieved through launch of several new schemes and facilities, increased distribution reach and market expansion through investor education and distributor training.
Kotak Mahindra Old Mutual Life Insurance Ltd.

Kotak Mahindra Old Mutual Life Insurance is 74: 26 joint venture of the Bank with Old Mutual plc. Kotak Life offers life insurance, deferred annuity and employee benefit products to individuals and groups. The business is distributed through three distribution channels viz. Tied Agency, Alternate Channels and Group Insurance. The business is value-driven with a focus on long-term shareholder value and an aspiration to meet policyholder expectations. Introduction of new products and focus on service delivery were primary drivers to this result. Consumer confidence in the private sector has substantially improved over the years, and going by the current trends, it is expected that the private sector will improve upon the perceived value to the consumer. Private sector insurance companies continued to garner a higher market share at 28.6% in the 2005-06 in comparison with 22% in the previous year 2004-05. As at March 31, 2006, Kotak Life Insurance had around 12,500 active life advisors who are continuously being trained to facilitate them to advise customers
12
in a proper manner. Currently, Kotak Life operates from 45 branches in 34 cities with a primary focus on the middle class and affluent population. Its market share was around 3.9% in private sector premium income and 1.1% in industry premium income for 2005-06. A survey conducted by AC Nielsen ORG MARG in September 2005 in top 5 towns placed Kotak Life at the top 5 brands among the life insurance brands recalled. The deficit in 2005-06 is lower than 2004-05 due to a favorable product mix that allows for higher expense allowances.
Most of the private insurers currently report accounting losses the typical policyholders P&L for a private player in F2006 is outline below (note the heavy expense for increasing policyholders reserves):
The 2 large expense heads are a) acquisition costs (largely commissions) and b) overheads. While acquisitions costs are typically 5% of total revenues, overheads are larger at 13% (indicative as at F2006). Going forward, both these cost heads are likely to fall as the company reaches critical mass and increases economies of scale. The increase required in policyholders reserves are also expected to reduce as incremental requirements would reduce as new business growth slows and the back book builds up for which most of the reserves have been provided for.
13
Key Business Drivers: Insurance is underpenetrated in India
Basic need for protection Demographic changes. o o Increasing working age population, dual earners shift to higher Income categories and higher saving levels Trend towards nuclear families and majority part from this younger generation is likely to insure them.
Tax benefit from Life Insurance
Better innovative products and services offered by the private sector- linked products.e.g. Unit linked Insurance products. Aggressive marketing and widening distribution by the insurance companies.
12
India thus, is a very promising high growth market given the under penetration, demographics, need for investment along with protection coupled with aggressive marketing will be the key drivers for the industry. Foreign holding in Indian life insurance companies is capped at 26% which limits the foreign arm bring in more capital. On the other hand the Indian partner may not have the financial capacity to inject in more capital. Due to this and given the number of marginal players, some of the private players may actually sell out. Eg. AMP Sanwar selling out its stake to Reliance Capital.
SWOT Analysis
Strengths: Kotak Group is present across several financial service businesses such as retail asset financing, wealth management, equity brokerage, investment banking, primary dealership, and asset management and insurance. Diverse business mix provides several income streams. This also helps the bank to offer a wide suite of services to customers and increases cross selling opportunities. Strong investment banking presence for eg. Helps in developing HNI clients for private banking. It is backed by a strong management team, which has a track record of managing market and credit risk well, and of being conservative in its approach. Its strong credit appraisal method has resulted in it possessing one of the best of assets in the industry. In FY06, its gross NPAs were 0.7%, while its net NPAs were just 0.2%.
Amongst the top players in the Investment banking and broking business. Moderate player in the Insurance, asset management, and PD business.
Majority of the Banks portfolio is retail which is high interest yielding as compared to corporate loans. Weakness Significant share of revenues are dependent on the Capital market businesses. Kotak faces significant competition from foreign and small private sector banks in majority of businesses. Kotaks limited branch network has impacted ability to raise low cost funds.
13
While Kotak is in the process of building up branch distribution and retail a deposit, its funding is almost entirely wholesale and is likely to remain so in the medium term. If rates were to increase further or liquidity were to tighten, Kotaks funding costs would increase disproportionately compared with its peers. All inclusive cost of funds will rise due to heavy expenses on branch expansion. Small size of the bank restricts ability to take large corporate exposures. The banks corporate portfolio is therefore significantly SME. Retail and institutional broking and margin funding are cyclical business. Earnings are directly related to the turnover in the stock markets.
Oppurtunities: Increasing Financial Savings: The Ratio of Financial savings to GDP is expected to go up from 16.7% of GDP in FY06 to 19.2% of GDP in FY16, according to a Morgan Stanley research forecast. And of the contributing factors, which is also expected to help achieve a strong economic growth is the size of working age population. Working age population is expected to go up to 65% of the total population from the current levels of around 58%. Private savings is expected to maintain a strong growth momentum, driven by improving share of working age population and higher exports. Indias Long term play is an interplay of three factors, demographics, reforms and globalization. The pattern of Household savings in India has undergone a major shift. There is a strong move towards shares and Mf units away from small savings the share of which has shrunk considerably. Equity debentures and MFs now account for 4.9% of household savings in FY2006, up from 0.1% in FY04. The shift is not at the cost of bank deposits, which have also risen from 38.53% to 47.4%. Despite the emergence of new payments systems such e-money, cask still accounts for 8.8% of the total domestic savings in the economy. Share of Different Instruments in household financial savings
12
Upward migration of Incomes across rural and urban area: India has seen rising affluence and growth of the consuming class NCAER data for top 24 cities in India shows migration to higher income levels growing at over 40% per annum
Aggressive Branch expansion strategy to benefit in the medium term facilitating increased access to low cost deposits and more branch banking and cross selling opportunities. Distribution of Insurance, mutual funds and other investment products will help garnering revenue as their business model is favored towards distribution. Growth in Retail credit, SME will continue to bolster revenue. Growth in economy would lead to higher demand for credit and other bank products/services. Kotak Mahindra Old Mutual life Insurance is expected to breakeven in 200809. The life industrys growth is related to demographics, purchasing power, economy growth rate, share of savings and government support through tax and fiscal sops. In the coming years, India is likely to have a growing middle and affluent class with a burgeoning service sector contributing significantly to the growth of Life Insurance Industry.
13
High potential in retail broking segment. Large under served demand in the segment in major cities outside metros. With the spread of the personal investments and equity culture, retail interest is expected to continue to grow and positively impact brokerage incomes the retail area has tremendous growth potential A study conducted by the Boston consultancy group(BCG) shows that managed assets in India is expected to grow by 22% per annum touch more than $1 trillion by 2015. Almost 40% of this growth is coming through MFs. The market for MFs alone is expected to tough $520 billion in the next 10 years. Broker dont fear whether the investment in the market is going to come through MFs or direct trading. The idea is to attract the retail investor and keep him with the firm so that one can sell him any kind of financial product that exists in the market. Indias Low penetration in financial products is driving brokerages to the retail market. Countries with more than a billion people have only 55 lakhs demat account. Also, the country has a young population and a growing GDP that will help the retail business of the brokers. As the market heats up for competition, players who have deep pockets to invest in building a credible consumer brand, invest in technology, and a large distribution and customer service reach probably will win the battle. Some structural changes in the Primary dealership business can offer great opportunities going forward. Distribution of government securities can be an even bigger opportunity in the future if RBI may hold primary auctions of government securities exclusively for PDs. This is the practice followed in many developed countries. PDs will also have a much bigger role to play as book runners when new instruments such as strips are introduced. Also, until now PD business has been highly volatile and uni-directional business. In other words, all Pds lost money when interest rates rose and all of them booked profits when there was a decline in rates. This has promoted many banks that had promoted PD subsidiary to merge the PD business with the bank. Banks that have merged their PD arms with themselves include corporation bank, standard chartered bank, Citibank, HSBC and Kotak Mahindra. Going ahead, like the developed markets, India too is expected to have adequate interest rate risk hedging mechanism and also short selling of government securities will be allowed. This will give a much required boost to the PD business. Scalability through increased brand awareness, market penetration and service offerings across all categories of financial services International business is nominal but going forward the opportunity to sell Indian products to global investors and global products to Indian investors could provide good revenues as India remains a very lucrative investment option in the long term.
12
Headroom for Additional Capital Going ahead, with the macro-economic indicators being in place, the Indian financial system is expected to be further deregulated and will pave the way for increased opportunities not only in the existing line of business, but also in the form of new instruments and products.
Threats: Downturn in capital markets may bring down revenues significantly If not Capital market, the business model is highly interest rate sensitive. An increase in interest rates significantly reduces both volumes and profit margins. Execution risk. The pace of change amid Kotaks conservatism and the competitive business environment could create execution risks. Competition from local and multinational players: RBIs roadmap for the entry of foreign banks and the acquisition of stake by the foreign entities in Indian private banks seems to be a step towards facilitating entry of foreign banks into India. However, the same is set to aggravate the tussle for market share in the already fragmented sector. Kotak, being a player in the financial sector, depends on the income, savings, and investment pattern of the households in the economy. Policy changes, rising crude oil prices or rising inflation could reduce savings and investments, thereby impacting growth.
13
Financial Information
12
13
12
13
12
13
12
13
Annexures
Shareholding Pattern as on December 31, 2006. Category of shareholder % Shareholdin g
(A) Shareholding of Promoter and Promoter Group (1) Indian Individuals / Hindu Undivided Family Bodies Corporate Sub Total Total shareholding of Promoter and Promoter Group (A) (B) Public Shareholding (1) Institutions Mutual Funds / UTI Financial Institutions / Banks Insurance Companies Foreign Institutional Investors Any Others (Specify) Foreign Bodies DR Sub Total (2) Non-Institutions Bodies Corporate Individuals Individual shareholders holding nominal share capital up to Rs. 1 lakh Individual shareholders holding nominal share capital in excess of Rs. 1 lakh Any Others (Specify) Non Resident Indians Overseas Bodies Corporate Trust HUF Clearing Members Sub Total Total Public shareholding (B) Total (A)+(B) (C) Shares held by Custodians and against which Depository Receipts have been issued Bank of New York - Depository Total (A)+(B)+(C) 50.30 5.31 55.60 55.60 3.74 0.03 22.91 0.48 26.20 1.16 6.52 6. 64 0.70 0.68 0.02 0.17 0.06 15.95 43.15 98.75 1. 25 100
The List of the subsidiaries and the shareholding of Kotak Mahindra Bank are as under: -
12
Name of the Subsidiary Kotak Securities Limited Kotak Mahindra Capital Company Limited Kotak Mahindra Old Mutual Life Insurance Company Limited ** Kotak Mahindra Prime Limited (KMP)*** Kotak Mahindra Asset Management Company Limited Kotak Mahindra Securities Limited Kotak Mahindra (International) Limited * Kotak Mahindra Inc. * Global Investments Opportunities Fund Limited * # Kotak Mahindra (UK) Limited * Kotak Mahindra Trustee Company Limited Kotak Mahindra Investments Limited Kotak Forex Brokerage Limited Kotak Mahindra Private-Equity Trustee Limited
Country of Origin India India India India India India Mauritius USA Mauritius UK India India India India
% shareholding of KMBL
100.00 100.00 74.00 100.00 100.00 74.99 74.99 74.99 74.99 74.99 100.00 100.00 100.00 100.00
* For the purposes of consolidating these subsidiaries accounts into KMBL (Consolidated), balances as per audited accounts for the 15 months ended 31st March, 2005 have been considered for the previous year. ** The Bank holds 51% of the equity and one of its subsidiaries holds 23% of the equity. *** Formerly known as Kotak Mahindra Primus Limited. The Bank held 60% of the equity till 4th October, 2005. Consequent to the realignment of the joint ventures with Ford Credit International (FCI), the Bank bought FCIs stake of 40% through its 100% subsidiary, Kotak Mahindra Investments Limited. Consequent to this, the profit and loss account of KMP has been consolidated on a line by line basis at 100% from the aforesaid date. # Global Investments Opportunities Fund Limited is a hybrid entity comprising of asset management and mutual fund activities. Consolidation is done in respect of the asset management portion of the entity having regard to the substance over form of the entity.
13
Indian Mutual Funds Industry History

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank. The history of mutual funds in India can be broadly divided into four distinct phases First Phase 1964-87 Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets under management. Second Phase 1987-1993 (Entry of Public Sector Funds) 1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990. At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores. Third Phase 1993-2003 (Entry of Private Sector Funds)
With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers
12
and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under management was way ahead of other mutual funds. Fourth Phase since February 2003 In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29,835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.
The graph indicates the growth of assets over the years.
13
Note: Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking of the Unit Trust of India effective from February 2003. The Assets under management of the Specified Undertaking of the Unit Trust of India has therefore been excluded from the total assets of the industry as a whole from February 2003 onwards.
12
Asset under management of the Various Players in the Industry

Sr. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Name of the Asset Management Company Reliance Capital Asset Management Ltd. UTI Asset Management Co. Pvt. Ltd. Prudential ICICI Asset Management Co. Ltd. HDFC Asset Management Co. Ltd. Franklin Templeton Asset Management (India) Pvt. Ltd. Birla Sun Life Asset Management Co. Ltd. SBI Funds Management Pvt. Ltd. DSP Merrill Lynch Fund Managers Ltd. Tata Asset Management Ltd. Standard Chartered Asset Management Co. Pvt. Ltd. Kotak Mahindra Asset Management Co. Ltd. LIC Mutual Fund Asset Management Co. Ltd. HSBC Asset Management (India) Private Ltd. Principal PNB Asset Management Co. Pvt. Ltd. Sundaram BNP Paribas Asset Management Co. Ltd. Deutsche Asset Management (India) Pvt. Ltd. Benchmark Asset Management Co. Pvt. Ltd. Fidelity Fund Management Private Ltd. ABN AMRO Asset Management (India) Ltd. ING Investment Management (India) Pvt. Ltd. J.M.Financial Asset Management Pvt. Ltd. Morgan Stanley Investment Management Pvt. Ltd. Canbank Investment Management Services Ltd. DBS Cholamandalam Asset Management Ltd. Lotus India Asset Management Co. Pvt. Ltd. Taurus Asset Management Co. Ltd. Sahara Asset Management Co. Pvt. Ltd. Escorts Asset Management Ltd. BOB Asset Management Co. Ltd. Quantum Asset Management Co. Pvt. Ltd. Total (A + B + C) Asset Under Management 39020 37535 34746 31424 23908 21190 17552 13440 13222 12746 12674 12237 12140 10333 7104 6330 6076 5873 5145 4067 3816 3118 2308 2263 647 261 181 129 118 59 339662 % 11.5 11.1 10.2 9.3 7.0 6.2 5.2 4.0 3.9 3.8 3.7 3.6 3.6 3.0 2.1 1.9 1.8 1.7 1.5 1.2 1.1 0.9 0.7 0.7 0.2 0.1 0.1 0.0 0.0 0.0 100.0
13
ASSETS UNDER MANAGEMENT AS ON 31st JANUARY, 2007 Category & Type wise (Rs. in Crore) Scheme Type Income Growth Balanced Liquid/Money Market Gilt ELSS Total Open End 35327 106841 7881 107204 2118 7990 267361 Close End 54338 14910 1502 1551 72301 Total 89665 121751 9383 107204 2118 9541 339662 (Rs. in Crore) Scheme Fund of Funds No of Schemes 32* AUM as on 31th January 2007 2540 Avg. AUM for the month 2552 % to Total 25 36 3 32 1 3 100
12
The Indian Life Insurance Sector

Insurance Industry in India is divided into 2 broad categories:
Since 1956, with the nationalization of insurance industry, the LIC held the monopoly in India's life insurance sector. From 1991 onwards, the Indian Government introduced various reforms in the financial sector paving the way for the liberalization of the Indian economy. The government wanted long term funds for infrastructure development of the country .To fund such activity, government wanted to attract long term savings in the form of life insurance funds. Insurance sector was then opened up for competition from Indian private insurance companies with the enactment of Insurance Regulatory and Development Authority Act, 1999 (IRDA Act). As per the provisions of IRDA Act, 1999, Insurance Regulatory and Development Authority (IRDA) was established on 19th April 2000 to protect the interests of holder of insurance policy and to regulate, promote and ensure orderly growth of the insurance industry. IRDA Act 1999 paved the way for the entry of private players into the insurance market, which was hitherto the exclusive privilege of public sector insurance companies/ corporations. subsequently, the Insurance industry had a number of entrants in the last 6-7 years. S.No Date of . Reg.
Name of the Company
1 2 3 4 5
23.10.200 HDFC Standard Life Insurance Company Ltd. 0 15.11.200 Max New York Life Insurance Co. Ltd. 0 24.11.200 ICICI Prudential Life Insurance Company Ltd. 0 10.01.200 Kotak Mahindra Old Mutual Life Insurance Limited 1 31.01.200 Birla Sun Life Insurance Company Ltd.
13
S.No Date of . Reg. 1 6 7 8 9 10 11
Name of the Company
12.02.200 Tata AIG Life Insurance Company Ltd. 1 30.03.200 SBI Life Insurance Company Limited. 1 02.08.200 ING Vysya Life Insurance Company Private Limited 1 03.08.200 Bajaj Allianz Life Insurance Company Limited 1 06.08.200 Metlife India Insurance Company Pvt. Ltd. 1 03.01.200 AMP Sanmar Life Insurance Company Limited. 2 Now known as Reliance Life Insurance company Ltd. 14.05.200 Aviva Life Insurance Co. India Pvt. Ltd. 2 06.02.200 Sahara India Insurance Company Ltd. 4 17.11.200 Shriram Life Insurance Company Ltd. 5
12 13 14
Market players and their share.

Life insurer LIC ICICI Prudential Bajaj Allianz SBI Life HDFC Standard Max New York Birla Sunlife Reliance Life Premium Feb' 07 2452.7 554.4 448.1 322.2 144.5 75.8 71.6 123.9 Upto Feb'07 43573.5 4068.9 2997.1 1712.0 1298.1 719.9 651.4 604.6 Upto Feb' 06 18834.7 1956.1 1940.2 512.5 778.9 363.4 478.0 150.8 Growt h 131 108 54 234 67 98 36 301 Market Share 75.21 7.02 5.17 2.95 2.24 1.24 1.12 1.04
12
Life insurer Aviva Tata AIG Kotak Mahindra Old Mutual ING Vysya Met Life Shriram Life Sahara Life Bharti Axa Life Total
Premium Feb' 07 62.2 58.1 62.6 35.8 24.2 15.3 4.8 1.6 4457.4
Upto Feb'07 582.9 546.5 443.7 349.9 234.8 124.6 25.7 4.5 57937.8
Upto Feb' 06 309.5 405.4 233.8 199.9 107.4
Growt h 88 35 90 75 119
Market Share 1.01 0.94 0.77 0.60 0.41 0.22
15.6
64
0.04 0.01
26286.1
120
100
Life Insurance: No of policies and premium per policy, LIC vs. private, YTD growth
No of policies sold (mn) LIC YoY LIC Share Private YoY Private share
Premium per policy (Rs) 10824 123%
Total value (Rs mn) 188615 149% 69%
17.4 12% 80% 4.3 93% 20%
20116 6%
86421 105% 31%
13

Kotak Mahindra Bank Final

Transféré par

Informations du document

Titre original

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Kotak Mahindra Bank Final

Transféré par

Droits d'auteur :

Formats disponibles

Kotak Mahindra Bank

Kotak Mahindra Bank

Kotak Mahindra Bank | 4/10/2007

Kotak Mahindra Bank Introduction.

Kotak Mahindra Bank | 4/10/2007

The Indian Financial Sector

Kotak Mahindra Bank | 4/10/2007

Consistent rise in GDP post 2004.

Rising Per Capita Income

Services maintained its vigorous growth performance.

Increasing Volumes in the Equity Cash and Equity Derivatives market.

Huge mobilization by the corporates from the Primary market.

Indian Banking Sector

Bargaining power of buyers:

Kotak Mahindra Bank | 4/10/2007

Bargaining power of suppliers:

Kotak Mahindra Bank | 4/10/2007

Kotak Mahindra Bank | 4/10/2007

Kotak Mahindra Bank | 4/10/2007

Kotak Mahindra Bank | 4/10/2007

Banking Business Model

Kotak Mahindra Bank | 4/10/2007

Kotak Mahindra Bank | 4/10/2007

Kotak Mahindra Bank | 4/10/2007

Kotak Mahindra Bank | 4/10/2007

Kotak Mahindra Bank The Business Model

Kotak Mahindra Bank | 4/10/2007

Kotak Mahindra Bank | 4/10/2007

Kotak Mahindra Bank | 4/10/2007

Kotak Mahindra Bank | 4/10/2007

Kotak Mahindra Bank | 4/10/2007

Kotak Mahindra Bank | 4/10/2007

Kotak Mahindra Bank | 4/10/2007

Other Income sources

Kotak Mahindra Bank | 4/10/2007

Kotak Mahindra Bank | 4/10/2007

Stressed Asset business:

Kotak Mahindra Bank | 4/10/2007

Kotak Mahindra Bank | 4/10/2007

Kotak Mahindra Bank | 4/10/2007

Kotak Mahindra Old Mutual Life Insurance Ltd.

Kotak Mahindra Bank | 4/10/2007

Kotak Mahindra Bank | 4/10/2007

Key Business Drivers: Insurance is underpenetrated in India

Tax benefit from Life Insurance

Kotak Mahindra Bank | 4/10/2007

Kotak Mahindra Bank | 4/10/2007

Kotak Mahindra Bank | 4/10/2007

Kotak Mahindra Bank | 4/10/2007

Kotak Mahindra Bank | 4/10/2007

Kotak Mahindra Bank | 4/10/2007

Kotak Mahindra Bank | 4/10/2007

Kotak Mahindra Bank | 4/10/2007

Kotak Mahindra Bank | 4/10/2007

Kotak Mahindra Bank | 4/10/2007

Kotak Mahindra Bank | 4/10/2007

Kotak Mahindra Bank | 4/10/2007

Kotak Mahindra Bank | 4/10/2007

Kotak Mahindra Bank | 4/10/2007

Kotak Mahindra Bank | 4/10/2007

Indian Mutual Funds Industry History

The graph indicates the growth of assets over the years.

Kotak Mahindra Bank | 4/10/2007